Brexit: Changes to the UK VAT Rules and Rates

The simplified VAT rules and reduced VAT rates have been benefitting European businesses in the UK. However, these rules will no longer be applicable once the UK has left the European Union. EU businesses will have to register for UK VAT registration as per HMRC’s announcements.

The UK government has taken steps to help EU businesses plan for a no-deal exit. Some temporary arrangements have been made for them to VAT register from 1 November, and it will be effective until the exit terms are agreed. Let’s discuss the implications of Brexit on VAT rates and how are these changes will affect EU businesses in the UK.

The implications of Brexit

UK VAT rates and rules are likely to change in the wake of the UK’s departure from the EU. However, the extent of this variance is highly dependent on trade negotiations between the two contingent bodies.

Back in 1973, when the UK first joined the European Union, it agreed to legislate VAT on all goods and services – excluding certain exceptions – produced in the state. Today, VAT revenue forms the third-largest source of income for the government. It seems that even after the transition period is complete, the country will choose to benefit from it.

While the UK will no longer be liable to oblige by the structures set by the EU, Northern Ireland will still have to abide by current UK VAT rates and rules. And the revenue collected will now stay with the United Kingdom government rather than passing onto the European Union. Nevertheless, Brexit will mark the state’s official exclusion from all instructions still intact for remaining EU members.

What happens next?

In retrospect, financial experts are speculating that the UK will not abolish the VAT system. It accounts for billions of pounds earned for starters, and most importantly, it has become a standard across the globe. Statistical data (2018 update) shows that 166 countries have a formal VAT system in place. The countries that don’t have a proper VAT system employ some other form of sales tax.

To put it in simple words, if the UK were to abandon the structure altogether, it would need to find an equally equipped replacement. However, considering current circumstances, it is mainly impractical and wholly unnecessary. In the end, we have to abide by the UK VAT rates and regulating rules that the governing bodies will come up with.

So then, what will change?

Essentially, we Skatax can expect a change in pace and should wait till the transition. In that, the governing bodies may adjust the existing UK VAT rates structure to relieve some of the EU’s restrictions. At the moment, the standard UK VAT rate stands at 20%, and news reports suggest that regulating bodies are discussing a 25% upper bound limit. Under the EU, members cannot charge more than the standard rate. Thus, with this removed, the UK will be able to extend the limit for some specific sectors.

Moreover, the country will also have the liberty to add and/or exclude items from the zero-rate system. There is a possibility of getting reduced VAT rates to more areas, given that the set minimum will no longer hold legislative importance. Needless to say, there is a high probability that increased flexibility can lead to reduced UK VAT rates. And this alone holds the power to create long-lasting ripples in the economic and political landscape of the country.

How can the potential disruptions affect cross-border trading?

Importing goods into the country will enable registered businesses to account for the UK VAT rates transactions immediately. Before Brexit, they were paying VAT upon completing the physical process. Interestingly, exporting companies can leverage zero-rating benefits when delivering their goods to member countries of the European Union. It would, however, require formal export declarations. In addition to this, how the government chooses to arrange this will be utterly ungoverned by the EU’s parameters.

On the other hand, additional customs duties – which were not applicable in the past – will now have to be paid. Although not impacted in the same way as those offering tangible goods, service companies may need to invest in outsourcing or franchising to keep their businesses running outside the UK. In this case, other potentially pressing restrictions will replace the importance of VAT implications.

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